Chapter 1: Governmental and Not-for-Profit

Accounting Environment and Characteristics

Multiple Choice

1. Which of the following is a distinguishing characteristic of a nonbusiness

organization?
a. Its revenues do not exceed its expenses
b. There is an absence of ownership interests that can be sold, transferred, or
redeemed
c. It does not depreciate its capital assets
d. It does not charge fees for any of its services
Answer: b

2. Which of the following activities is performed by governments but not by not-for-

profit organizations?
a. Issuing federal tax-free debt
b. Receiving grants
c. Preparing budgets
d. Providing services to constituents
Answer: a

3. Government and nonprofit accounting focuses on which of the following?

a. Calculating profit or loss
b. Protecting investors from fraud
c. Demonstrating accountability
d. Reporting to management
Answer: c

4. Which of the following is not a reason that governmental accounting is different

from business accounting?
a. Different users of financial reports
b. Expected long-life of governments
c. Capital assets are used by governments
d. Revenues that are unique to governments
Answer: c

5. Which basis of accounting is used for the basic governmental functions of state and
local governments?
a. Cash basis of accounting
b. Modified accrual basis of accounting
c. Accrual basis of accounting
d. Regulatory basis of accounting
Answer: b
 6. For which types of organizations is the Financial Accounting Standards Board
(FASB) responsible for establishing accounting and financial reporting standards?
a. Business-type organizations and not-for-profit organizations, including
not-for-profit colleges, universities and health care providers
b. Business-type organizations; not-for-profit organizations; and all colleges,
universities and health care providers, whether organized as not-for-profit
or governmental entities
c. Business-type organizations only
d. All entities, except for those under the jurisdiction of the American
Institute of CPAs
Answer: a

7. A not-for-profit organization performs all of the following activities except

a. Charging a fee for services provided
b. Paying dividends to shareholders
c. Purchasing long-lived (capital) assets
d. Paying overtime to employees
Answer: b

8. The Governmental Accounting Standards Board (GASB) establishes financial

reporting standards for state and local governmental entities. An entity possessing
the following characteristics should follow GASB standards:
a. The power to enact and levy a tax.
b. The power to issue debt, for which its interest is exempt from federal taxation.
c. The potential that a government could unilaterally dissolve the entity and
assume their assets and liabilities.
d. All of the above.
e. Only a and b.
Answer: d

9. For which types of organizations is the Governmental Accounting Standards Board

(GASB) responsible for establishing accounting and financial reporting standards?
a. All state, local, and Federal organizations
b. All state and local governmental organizations, except for state and local
governmental colleges, universities, health care providers, and utilities
c. All state and local governmental organizations, including government-
sponsored colleges, universities, health care providers, and utilities
d. All governmental and not-for-profit organizations
Answer: c

10. Which entity establishes financial accounting standards and principles for the
federal government?
a. FASB
b. GASB
 c. FASAB
d. None of the above.
Answer: c

11. Which of the following is the most authoritative source of accounting standards for
cities and counties?
a. Current practices widely used by not-for-profit entities
b. GASB Statements and Interpretations
c. AICPA Industry Audit Guides
d. Implementation guides published by GASB staff
Answer: b

12. Concepts statements issued by the GASB and the FASAB emphasize which of the
following objectives of governmental financial reporting?
a. It should help the chief executive assess the entity's financial condition.
b. It should help department heads assess their department's results of
operations.
c. It should help the judiciary determine whether the government has
complied with the law.
d. It should help report users assess accountability.
Answer: d

13. An activity that is unique to governments is

a. Budgeting
b. Cash management
c. Levying taxes
d. Advertising
Answer: c

14. To what extent do organizations that use fund accounting also report on the entity
as a whole?
a. Organizations that use fund accounting are not required to report on the
entity as a whole
b. Organizations that choose to report on the entity as a whole are not
permitted to use fund accounting for internal purposes
c. Organizations that use fund accounting are required to report on the entity
as a whole
d. Organizations that use fund accounting have the option of reporting either
on funds or on the organization as a whole
Answer: c

15. Not-for-profit organizations obtain their revenues primarily from

a. Sales to customers
b. Contributions from donors
c. Taxes on personal property
d. Taxes on real property
Answer: b
Problems

16. (True or false)

State whether these statements are true or false. Discuss why the false statements
are false.

a. An entity is likely to be a governmental entity if a controlling majority of

its governing body is appointed by governmental officials.
b. The objective of a government is to provide services to its constituents.
c. AICPA pronouncements have approximately the same level of authority as
articles appearing in the Journal of Accountancy.
d. The objective of a not-for-profit organization is to provide services to its
constituents.
e. By definition, all funds have cash, financial resources, and capital
resources.
f. The objective of a business organization is to enhance the wealth of its
owners.

Answer:
a. True
b. True
c. False. AICPA standards always have a higher level of authority than other
accounting literature, such as the Journal of Accountancy. If made
applicable by the FASB or the GASB, AICPA standards have Level I
authority. Other accounting literature is at the lowest level of authority.
d. True
e. False. Some types of funds may have only financial resources and not
capital resources.
f. True

17. (Discussion problem on fund accounting)

Discuss the nature and purpose of "fund accounting."

Answer:
Fund accounting is the practice under which an organization segregates its assets,
liabilities, and net position into separate accounting entities, called "funds," based
on legal restrictions, donor-imposed restrictions, or other regulations. Each fund
has a set of self-balancing accounts that records the unique assets of that fund and
the claims against those assets. Separate financial statements may be prepared for
 each fund. The purpose of fund accounting is to help ensure that resources are
expended only for their authorized purposes and in compliance with applicable
restrictions.

18. (Matching organizational characteristics with different types of organizations.)

Listed below are some identifying characteristics of organizations. Indicate with a

check mark () in the appropriate column(s) those characteristics that apply to each
type of organization. Some characteristics may apply to more than one type of
organization.

Characteristic Type of Organization

Business Not-for-Profit Government
Has a need for accounting
Operates according to a legal budget
Has equity shareholders
Receives voluntary contributions
Levies and enforces collection of taxes
Revenues are based on exchange transactions
Follows fund accounting
Subject to FASB pronouncements
Is exempt from federal income taxes
Financial reporting focuses on entity as a whole

Answer:

Characteristic Type of Organization

Business Not-for-Profit Government
Has a need for accounting
Operates according to a legal budget
Has equity shareholders
Receives voluntary contributions Y
Levies and enforces collection of taxes
Revenues are based on exchange transactions* Y Y
Follows fund accounting
Subject to FASB pronouncements
Is exempt from federal income taxes
Financial reporting focuses on entity as a whole

19. (Discussion problem on entity and GAAP hierarchy)

A large private bus company in Empire City went bankrupt. At Empire City's request, the
state legislature established a legally separate public benefit corporation named Metro City
Bus. In the law establishing Metro City Bus, Empire City was authorized to appoint
Metro's entire governing body, and Metro was authorized to issue tax-exempt debt to
assume the assets of the private bus company.

When Metro City Bus went to prepare its financial statements, two questions were raised.
Was Metro City Bus a government? And if it were a government, how should it prepare its
cash flow statement? Research showed that, when the bus company was a private
organization, it followed FASB Statement No. 95, which required cash flow statements to
 be prepared using a particular format. However, GASB Statement No. 9 did not approve
the use of FASB Statement No. 95, and instead required governmental enterprises to
prepare cash flow statements using a different format. An article published in the Journal
of Accountancy suggested that all business-type activities, private or governmental, ought
to adopt FASB Statement No. 95.

Required:
a. Discuss whether Metro City Bus is or is not a governmental entity. What are the
specific factors in this situation that cause Metro to be one or the other?
b. Discuss whether Metro City Bus should prepare its cash flow statements using the
FASB format or the GASB format. What are the factors that affect your conclusion?

Answer:
a. Metro City Bus is a governmental entity because it was established by law as a public
benefit corporation. Also, its governing board is appointed by government officials and it
has the power to issue tax exempt debt.
b. Metro City Bus must prepare its cash flow statements using the format prescribed by the
GASB. GASB Statements and Interpretations rank highest in the hierarchy of generally
accepted accounting principles for state and local governments. Because the GASB
issued a specific Statement for preparing cash flow statements (GASB Statement No. 9),
that Statement must be followed rather than the FASB statement on cash flows. The
Journal of Accountancy article has no standing in this situation.